Public Information Notice No. 04/47

Public Information Notice: IMF Concludes 2003 Article IV Consultation with Chad

April 29, 2004

On March 19, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Chad.¹

Background

A three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) was approved for Chad on January 7, 2000 in an amount equivalent to SDR 36.4 million (65 percent of quota) and, after two augmentations, amounted to SDR 47.6 million (85 percent of quota). Following two extensions, the arrangement expired on January 6, 2004. Chad reached its decision point under the Enhanced Heavily Indebted Poor Country (HIPC) Initiative on May 16, 2001. Relief under the Initiative amounts to about US$170 million in net present value (NPV) terms.

Economic growth is estimated to have been around 10 percent annually in 2002 and 2003 reflecting the oil pipeline construction. Chad started to export crude oil for the first time in October 2003. After a higher-than-targeted inflation rate in 2002, a significant appreciation and a good harvest contributed to deflation in 2003. Higher imports led to a larger-than-anticipated external current account deficit in 2003. Following high growth rates in 2001 and 2002, broad money growth dropped dramatically in 2003. In 2003, as in the previous year, the fiscal deficit target was achieved, but revenue collection was somewhat weaker than programmed and expenditure composition problems persisted, with priority sector spending falling below target. Further, external arrears reemerged, including to the Fund, and resources released under the HIPC Initiative were used for other than the intended purposes.

On the structural front, performance has been uneven. Progress was made during 2003 towards putting in place the modalities for the use of Doba oil resources, but the work was not completed by the time the first oil receipts became available to Chad. The Council of Ministers has not yet adopted the principles of the use of revenues from potential new oil fields in the spirit of the legislation now applicable to the Doba fields. In other areas of governance, including public expenditure management, progress has been mixed. The reforms of the cotton sector and the civil service have also experienced delays.

Performance under the PRGF-supported program during 2003 remained weak. Chad did not meet four quantitative performance criteria and the structural performance criterion for the sixth review. The three structural benchmarks were also not met on time. In view of this overall weak performance, and given that there was not enough time for measures to be taken to present a sufficiently strong case for completing the review, the latter could not be completed in the short time remaining before the PRGF arrangement expired in January 2004.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal and the conclusions of the ex-post assessment of Chad's performance under Fund-supported programs since 1995. Chad has succeeded in recent years in broadly maintaining macroeconomic stability and a high growth rate of economic activity, benefiting from the oil pipeline construction.

Directors welcomed the progress made in certain areas of structural reform, but emphasized that important weaknesses remain. They referred to the need to improve governance, public administration and expenditure management, and fiscal revenue mobilization, and to further reform the cotton, domestic energy, and financial sectors, with the objective of making the economy less dependent on oil revenues, strengthening the medium-term growth prospects, and tackling poverty more effectively.

Directors noted that with growing oil revenues, Chad will be better positioned to address the large social and development needs of its population. In that vein, Directors commended the authorities for their efforts to ensure that oil revenues are used transparently and efficiently on priority poverty reduction and social expenditures. They welcomed the recent promulgation of legislation on the oil revenues policy, and emphasized the need to implement it fully and to resist pressures to depart from the agreed framework. Directors generally encouraged the government to adopt principles concerning the use of revenues from potential new oil fields that are consistent with those already applying to revenues from the Doba fields.

Directors considered that, notwithstanding the favorable prospects for the oil sector and the increase in related revenues to the government, a prudent budgetary policy would be advisable in order to prevent an erosion of the competitiveness of the non-oil sectors of the economy, especially cotton and agriculture-the sources of employment of much of the population. Directors further emphasized that resources will need to be deployed prudently, and the agreed modalities on use of oil revenues scrupulously observed. In accordance with these modalities, Directors advised the authorities to save a larger amount of earmarked oil revenues under the stabilization mechanism in 2004 than is currently envisaged, and to further increase these savings in 2005-06. To ensure that oil wealth is preserved for future generations, Directors encouraged the authorities to move expeditiously to finalize the operational arrangements for the Fund for Future Generations, including setting up its investment committee and deciding on its broad investment strategy.

Directors considered that increased oil-related revenues should not be a substitute for efforts to improve non-oil revenue performance, including through a widening of the tax base and rapid implementation of the customs administration and livestock and indirect taxation action plans. This would help finance nonpriority and priority expenditures that are not covered by earmarked oil resources, and improve the prospects for maintaining fiscal sustainability after oil resources have been exhausted.

Directors welcomed the authorities' commitment, in the context of the 2004 budget, to maintain the ceiling on growth of the wage bill, and to address the operational problems of the state-owned electricity and water company. At the same time, Directors recommended that nonpriority expenditures be reduced in 2004 to a level that would respect the agreed modalities for the use of oil revenues, in order to provide room to focus on poverty reduction. In this context, they expressed concern about the deviation from the targeted composition of spending and the reemergence of extrabudgetary operations in 2003, and emphasized the need for stronger political commitment to priority poverty reduction and social sector spending.

Directors welcomed the progress made in recent years in increasing transparency in the use of public resources. However, they stressed that stronger efforts are needed to improve public expenditure management and accountability in public spending, as revealed by recent audits. In particular, procurement policies would need to be strengthened, and irregularities in procurement identified and prosecuted. In this regard, the promulgation of the new procurement code is in the right direction. Directors urged the authorities to move forward with the implementation of key measures to strengthen governance and the reform of the civil service. In light of the serious capacity constraints, Directors stressed the need for well-targeted technical assistance in these areas.

Directors commended the authorities' plans to implement further structural reforms. In the financial area, on-site bank inspections will be increased to strengthen supervision. Directors welcomed the envisaged review of the effectiveness of anticorruption legislation in the context of judicial system reform, and stressed the need to further improve the business and investment climate and foster non-oil private sector development. Directors urged the authorities to accelerate, with World Bank involvement and taking into account the results of the poverty and social impact analysis of cotton sector reform, the privatization of the state-owned company, Cotontchad, now slated for privatization in 2005.

Directors regretted the reemergence of external payments arrears. Although noting that those to the Fund have been fully cleared, they urged the authorities to eliminate all outstanding external arrears promptly and to avoid incurring new arrears. They also expressed concern about the use of HIPC interim relief for other than the intended purposes, and the lack of necessary transfers to the HIPC account; they urged the authorities to replenish the HIPC account quickly.

Directors noted that Chad's statistical system remains weak. They welcomed the improvement in the quality of real sector data, but urged the authorities to make greater efforts to improve the balance of payments, government finance, and monetary statistics.

Directors concurred with the conclusions of the ex post assessment of Chad's performance under ESAF and PRGF arrangements. Although the fundamental macroeconomic goals of the programs were broadly achieved, the formulation and implementation of macroeconomic and structural policies has shown substantial weakness, pointing to the need for improvement in program ownership and administrative capacity. Directors considered that the authorities should drive with greater determination the design and implementation of their economic policies.

Directors observed that the implementation of a strong country-owned economic reform program addressing the weaknesses under past Fund programs-while paying due regard to capacity constraints-could lay the basis for a follow-up PRGF arrangement, and pave the way for reaching the completion point under the HIPC Initiative.